John McCartney: Housing obsolescence commonly overestimated, and depreciation heavily concentrated in rural Ireland

15 January 2019

Like many people I believe that the resolution of Ireland’s housing problems ultimately requires more supply.  However, the challenge of expanding our residential stock is compounded by the fact that some properties get knocked-down every year and have to be replaced.   

Unfortunately, industry commentators disagree about the extent of housing demolitions – recent estimates range from 6,000 to 16,000 units per year.  Moreover, whatever the correct number, the assumption that all of these units need to be replaced is illogical and leaves us with upwardly biased housing completions targets. 

While it is not always clear how commentators are deriving their housing obsolescence estimates, economist John FitzGerald proposes a practical and transparent method.  FitzGerald begins by adding-up the number of housing units built between two Censuses.  The extent to which this number exceeds growth in the housing stock over the same period must represent the number of units that went obsolete.  Applying this approach to the latest data we find that 29,500 new homes were built between April 2011 and April 2016.  However Census records show that the housing stock only crept up by 8,800.  This suggests 20,700 units (4,140 per annum) must have become obsolete - an annual depreciation rate of 0.21 per cent. 

Immediately this casts doubt on the obsolescence estimates that are currently being advanced.   But this is only the tip of the iceberg.  Because, in addition to the fact that fewer dwellings are being demolished, we can challenge the logic that they all need to be replaced. 

Examining the data at a more local level we discover that housing obsolescence varies dramatically by region.  As illustrated by the green areas of the map, Dublin, Cork, Galway and their surrounding commuter belts have very low depreciation rates.  Instinctively, one might suspect this is because the population is growing most strongly in these regions and the properties are therefore needed.  In contrast, as shown by the red areas, obsolescence is much higher in the West of Ireland.  Again, one might infer that this reflects slower (or sometimes negative) population growth in Western counties.  This results in weaker housing demand, higher vacancy rates, and lower capital values which may not justify the expense of maintaining superfluous properties.

Indeed this intuition is supported by further analysis of the data.  The accompanying graph shows a clear inverse relationship between population growth and obsolescence;  counties with stronger population growth tend to have fewer demolitions.   As seen in the graph Dublin and the counties of Leinster (blue dots) are clustered towards the top left corner – indicating the coincidence of a rapidly expanding headcount and few housing demolitions.  In contrast, the counties of Connaught (green dots) tend towards the bottom right – with sluggish population growth and high depreciation of the housing stock.  Munster (red dots) is similar to Connaught, although the values are less extreme.  Obvious exceptions to this pattern are Cork and Galway where the presence of major urban centres acts as a magnet for population growth, leading to preservation of the much-needed housing stock.  

Ultimately, there are two conclusions.  Firstly, depreciation is adding much less to the annual home building requirement than many commentators are claiming.  At most, it can be no more than 4,100 units per annum.  But, when we consider that many of the properties that are being knocked-down do not need to be replaced because they are in locations which render them surplus to requirements, the figure actually becomes substantially lower.  By my calculations fewer than 3,000 dwellings need to be built each year to cover obsolescence.  This is really good news because it means that – relative to the most extreme estimates – we are already 13,000 units closer to meeting our annual home building target.

Secondly, this analysis highlights the futility of building too much in the wrong place.  In this context it is very positive that residential development is now happening in the places where it is most needed; 39 percent of dwelling completions and one third of planning permissions in the last year have been in Dublin.  However, we must remember that it is not just about the number of units, but also the type of units.  In this respect public policy must achieve a tricky balance between encouraging development and ensuring that residential schemes are designed to meet the long-term housing needs of our citizens.  That, perhaps, is another article for another day.

Dr. John McCartney is Director of Research at Savills and is on the Editorial Board of the Journal of Property Research